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You now know what to include in your financial strategy—but how do you make sure your strategy is one you can stick to over decades? Housel names three principles to keep in mind: Expect your future goals to change, prioritize sense over logic, and develop a survival mentality.
In Chapter 14, Housel shares one critical key to developing a long-term strategy you can stick to over decades: Expect your future goals to change, react quickly when they do, and build flexibility into your financial plan.
As we’ve seen, one major element of financial success is letting your money sit as long as possible so it accumulates the maximum amount of compound interest. Housel posits that leaving your money alone for this long is difficult partly because people change, but since they’re unable to predict how they’ll change, they don’t invest their money in ways that will work for their future selves.
Housel explains that when making financial plans, most people fall victim to the end-of-history illusion, a psychological phenomenon where you recognize that you’ve changed significantly from who you were, but you don’t expect to change significantly from who you are now. But in reality, you are likely to change just as much in the future as you did in the past. For example, if you’ve changed your career twice between 20 and 30, you might recognize that you’ve changed significantly since 20, but you expect that you won’t change your career again for the rest of your life.
(Shortform note: Why do people fall for the end-of-history illusion? The psychologists who discovered the end-of-history illusion (which they also called the end-of-history effect) suggest a few possibilities. One is that believing you don’t change is comforting: It’s terrifying to imagine that, for example, your future self is so different from your current self that any plans you make now—both financial and otherwise—won’t work for them.)
How can you reconcile the reality that you’ll change with the necessity of leaving your money alone?
Housel makes two recommendations.
#1: Don’t make extreme financial plans.
Specifically, Housel recommends avoiding any plans that involve extremes in your commute, savings, or personal time, and creating plans that involve moderation in all three areas instead.
(Shortform note: What exactly counts as extremes in your commute, savings, or personal time? Housel never defines this, and what counts as moderation in all three will likely differ drastically depending on your age, location, and personal location. So instead of comparing yourself to others not in your situation, consider going with the options that feel moderate to you, even if they don’t align with what is actually average.)
Why? First, Housel explains, if you make an extreme financial plan, you may regret your choices. For example, an entrepreneur who devotes 100% of his time to building his company and zero time on his relationships may be happy in his 20s. But he may regret this decision at 45, when he’s financially successful but has no loved ones to share this success with.
(Shortform note: If you do make an extreme financial plan and end up regretting it, one way to ease the pain is to find the silver lining: Learn something from the regret and apply it to your actions in the future. That way, even if you don’t get your new goal, you won’t feel as badly. You’ll also likely feel less stressed about having to work harder for your new goal because you won’t consider the time a total waste.)